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Fresh turmoil has hit the US sub-prime mortgage sector after a key indicator of the value of derivatives based on the risky housing loans fell to a new low.

The ABX sub-prime index, which tracks the cost or spread of credit derivatives on 20 bonds secured by sub-prime mortgages and home-equity loans, plunged to 61 cents on Friday after trading at above 97 cents at the start of the year.

The drop followed a widespread downgrade of the debt securities, which are made to those with poor credit histories, by rating agency Moody's. The rating agency marked down the credit ratings on 131 bonds backed by pools of speculative loans.

The fall, which came after the index had rebounded in mid-May to 72 cents from a low of 62 cents in February when the rout in the US mortgage sector accelerated, means the cost to investors of buying synthetic credit protection against default on the loans has risen sharply.

The development comes days after Goldman Sachs and Bear Stearns unveiled second quarter results that were negatively affected by the US mortgage market meltdown.

Market prices of sub-prime backed-bonds have swung widely in recent months as investors have feared many securities could default as mortgage losses rise.

Moody’s said it decided to take the downgrade action, which affects some $3bn (€2.24bn) worth of sub-prime mortgage-backed bonds, because of unusually high rates of defaults and delinquencies among the underlying mortgages.

The $3bn of bonds affected by the downgrade only represent less than 1% of the over $400bn in sub-prime mortgage-backed bonds that were issued in 2006.

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Some investors, as a result of the downgrade, may be forced to sell bonds whose ratings were cut to "junk" or sub-investment grade from investment-grade, while some may have to write off losses in their portfolios.

Moody’s is reviewing 247 bonds for downgrades, including 111 whose ratings it had just lowered.

The downgrades, however, are so far concentrated among bonds backed by “second-lien” loans, which are taken out on homes that have already been pledged as collateral on another mortgage.

Moody's said second-lien mortgage loans that were bundled into bonds in 2006 “are defaulting at a rate materially higher than original expectations".

It said such loans were originated when underwriting standards were very aggressive, and have deteriorated significantly as the pace of home-price appreciation has slowed, prompting most of the bond downgrades.

Around $36.5bn in securities backed by second-lien loans were created by US banks last year, less than 10% of the $483bn in securities backed by sub-prime loans that were issued, according to data from Inside Mortgage Finance.